What gold, silver mining investors should do next

SAN FRANCISCO (MarketWatch) — A 40% year-to-date drop in benchmark indexes for gold and silver mining shares isn’t a good reason to hate them.

That may sound like a leap of faith many investors aren’t ready to take. But some money managers are saying the patient investor, or the one who can hang on for a year or two, stands to ride a rebound in gold prices to some outsized stock gains. And here and there, there are signs of life for miners.

Gold bears vs. gold bulls

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The price of gold has been falling in recent months. Francesca Freeman and Michael Weir debate whether the trend is set to continue or whether the bulls could be about to take charge. Photo: Getty Images

But first, that investor needs to be comfortable with a sector that’s awash in red. The NYSE Arca Gold Miners index
GDM, +1.97%
and the Market Vectors Gold Miners exchange-trade fund
GDX, +2.15%
which tracks the performance of it, have each lost about 40% year to date. The Philadelphia Gold and Silver Index
XAU, +1.98%
is down about 39%.

That coincides with declines in futures prices for gold
US:GCQ3
of about 17%, and silver, roughly 25%, year to date.

And as long as the U.S. dollar is “strong and investors want to own large-cap companies paying dividends, gold is not likely to rebound,” he said. “If investors have no patience and no stomach for volatility they should not own precious-metals companies now.”

But for those investors who are “patient,” over the next three to six months they should buy some shares in gold and silver companies, said Gissen.

“If they do, they’re likely to make money over the next year or two — in some cases, a lot of money,” he said. That’s because, according to Gissen, gold prices should rise over the next two years.

Tough to grasp

Making money in a sector that has lost so much this year is tough to grasp. After all, both the XAU and GDM fell to levels this month that they haven’t seen since 2008.

“It has been a true routing in the miners and particularly at the smaller end of the sector,” said Brent Cook, economic geologist and editor of Exploration Insights, referring to the junior miners.

The Market Vectors Junior Gold Miners ETF
GDXJ, +1.90%
has lost 43% for the year.

Mining companies have yet to see a bottom, said Cook. “All the mining companies are moving into panic mode, cutting exploration and development with the hopes of improving earnings by tweaking the mines they have been tweaking for years now.”

Still, he said he’s hanging on to the companies with projects he believes are undervalued and can survive for a few years.

“It is remarkable that there are junior companies that own gold deposits with positive economic studies that are selling for little more than their working capital,” Cook said. “There are some rather obvious dislocations out there.”

A big reason for those dislocations has been the plunge in gold prices, which lost almost 8% in April following a stampede out of the SPDR Gold TrustGLD, +0.63%
the largest U.S. gold-backed exchange-traded fund. Last month, nearly $7 billion funds left the ETF, according to IndexUniverse.

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